Psychological Foundations of Incentives

56 Pages Posted: 20 Feb 2002

See all articles by Armin Falk

Armin Falk

briq - Institute on Behavior & Inequality

Ernst Fehr

University of Zurich - Department of Economics

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Date Written: January 2002

Abstract

During the last two decades economists have made much progress in understanding incentives, contracts and organizations. Yet, they constrained their attention to a very narrow and empirically questionable view of human motivation. The purpose of this Paper is to show that this narrow view of human motivation may severely limit understanding the determinants and effects of incentives. Economists may fail to understand the levels and the changes in behavior if they neglect motives like the desire to reciprocate or the desire to avoid social disapproval. We show that monetary incentives may backfire and reduce the performance of agents or their compliance with rules. In addition, these motives may generate very powerful incentives themselves.

Keywords: Incentives, contracts, reciprocity, social approval, social norms, intrinsic motivation

Suggested Citation

Falk, Armin and Fehr, Ernst, Psychological Foundations of Incentives (January 2002). CEPR Discussion Paper No. 3185. Available at SSRN: https://ssrn.com/abstract=301322

Armin Falk (Contact Author)

briq - Institute on Behavior & Inequality

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Ernst Fehr

University of Zurich - Department of Economics ( email )

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